Did We Just Become a Third World Country?

In just over an hour Apple will report earnings which are expected to be a sole silver lining among the otherwise dreary retail landscape of the fourth quarter. However, those curious for an advance glimpse of what AAPL’s margins may be are advised to look no further than its chief supplier – Taiwanese mega contract manufacturer FoxConn, with over 1.2 million employees on the mainland. The reason Foxconn may be of interest is that as Reuters reports, as a result of soaring wages on the mainland, and in its ongoing strategy to keep worker compensation as razor thin as possible, the fabricator is now actively looking to expand outside of China. Among the places considered? Indonesia of course. And, drumroll, the United States! In other words, from the perspective of Foxconn, US labor now has greater wage competitiveness than China.

It’s not just so much that American workers suddenly cost less, but we are much more productive. Combine that with stagnant wages here and rising wages in China… and Professor Wiggleroom might have found a way to escape more gloomy jobs news.

Bet Foxconn is hiring robots not humans in their US plants. Having their manufacturing facilities in the US lowers transportation cost to market.

Most important reason is: China is wobbly. The ruling elite is fighting a bloody war. Four factions: Military, Oil tycoons, Children of the Red founders, and the Princelings are at each other's throat.

I call BS. If American labor is more productive (in per-dollar terms), it's only because capital investment is more secure in the U.S. than in China. That's a roundabout way of saying "capital flight from China".

Chinese capital flight has been ongoing for the last several years now, but not in consumer electronics manufacturing. If things are bad enough for Foxconn to move significant operations here, then the winds of war just got upgraded from breeze to gale.

Actually, I can anecdotally confirm the report. I was out to dinner last Friday night with a friend who manages a large portfolio. His brother has been a very senior-level executive for a large international company that is based here in the states. Many years ago, this company moved a huge percentage of their manufacturing plants to China. This friend's brother is considered by many to be an expert in the ins-and-outs of making things happen in China (i.e., who to pay off, and how much; yes, it really is as bad as they say).

Apparently, this company is looking to uproot from China and move their facilities elsewhere. Yes, some other Far Eastern countries are on the short list. But the U.S. is at the top. Why? The ROI is simply highest here. Between the stability and transparency of the relative economies, the reliability of the workforces, and, believe it or not, the costs of hiring, training, and retaining labor, we are better than competitive. Even after all of the costs of moving and retraining a new workforce from scratch, the payoff is apparently enormous.

Obviously, the proof is in the pudding. But my friend sounded pretty confident (and he earns a lot of money making the correct calls on stuff like this) that his brother was going to move the plants back to the States. I'm definitely going to be following up with him over time. It's not going to be any time soon. But I think the final decision happens mid-summer.

Over the last few years I've been involved with production decisions like that one on a multiple occasions, and I'm not surprised at your anecdote. But those are American companies--the rules are different, the "subsidies" are different, and the bribes are different.

Foxconn is a Chinese (OK, Taiwanese) company. That's a whole other ball game. If this is true it's a very big deal--and not one that points to stability in Asia.